Why Did Bitcoin Fall So Far, So Fast? Weiss Ratings Explains

2/8/2018 7:41 AM ET

An independent US securities rating agency, which ranked Bitcoin below Ethereum last month, has comeback with a new report to explain its decision to rate bitcoin a mere C+ grade.

In a whitepaper titled "The Bitcoin Rating Controversy: Why We Give It a C+", Weiss Ratings tells readers to take a look at the crypto currency market to see what happened after the first Cryptocurrency Ratings was issued on January 24.

Bitcoin plunged from $11,500 to below $6,000, or about 47 percent, within two weeks of publishing the report.

However, the bitcoin is recovering after testimony from the chairmen of Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC), that set a positive tone.

Weiss Ratings faced widespread criticism over the report and suffered a hack of its site temporarily. Many in the crypto community fiercely denounced the grade as overly punishing.

The Florida-based firm tries to answer the outcry by revealing in the 14-page report key factors and data behind the rating.

Aiming to address both investors and developers, the Weiss model combines a number of sub-models: Investment Risk and Reward, adapted from its stock and ETF ratings, plus Fundamentals and Technology, which are unique to cryptocurrencies.

Despite rapid price appreciation in 2017, Bitcoin has been losing ground to competing altcoins and currently ranks low. Due to the extreme returns and price volatility of recent months, it should come as no surprise that Bitcoin does not achieve a stellar grade on this index either, the whitepaper says.

Bitcoin does well in terms of network security, usage, developer participation, and user popularity. However, it underperforms in network capacity, as evidenced by a meager four transactions per second and fees of about US $10 each; and centralization, with five large mining pools controlling nearly three-quarters of the hashrate.

Bitcoin does well with regards to the security of its blockchain, but is mostly stuck in technology that's falling behind the times, according to Weiss.

The cryptocurrency space is growing at an unprecedented pace, and some new entrants to the marketplace are giving Bitcoin a run for its money both in terms of adoption and technology.

Bitcoin's dominance fell from almost 90 percent at the beginning of 2017 to approximately 33 percent today. And looking ahead, this trend could continue, Weiss Ratings founder Martin D. Weiss says.

In his assessment, it is driven by more than just random speculation, investor psychology, regulatory threats or other extrinsic factors.

"It ties back to measurable deficiencies in Bitcoin's design and network performance that cannot be promptly overcome. Despite the influence of rumor and hype, at the end of the day, the investor marketplace picks up on these deficiencies and responds to them accordingly."

Bitcoin's network capacity is saturated, and is leading to a rollback in adoption by merchants and payment services. "The reasons they consistently give — high fees and slow confirmation times — validate the findings of our Network Capacity Index".

Weiss Ratings commented,"The crypto ecosystem is evolving at a very rapid pace; that older technology will be upgraded or discarded; and that, ultimately, its future is both very bright and virtually unlimited."

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